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September 7,
2009
Dear Professional Advisor,
Greetings from
Immanuel St. Joseph's Foundation. I am pleased to share with you the
latest news from Washington, tax law updates, PLRs, Case Studies and
timely articles. We provide this weekly eNewsletter and web site to
our professional advisor friends as a complimentary service.
Please feel free to call me at 507-385-2932 if I can run a proposal
or be of assistance to you.
Cordially
yours,
Bob Weiss
Immanuel St. Joseph's Foundation
1125
Mulberry St.
Mankato, MN 56001 |
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| Immanuel St. Joseph's
Foundation |
September 7,
2009 |
GiftLaw Weekly eNewsletter -
September 7, 2009
- WASHINGTON
HOTLINE
- PLR THIS
WEEK
- CASE OF THE
WEEK
- ARTICLE OF THE
MONTH
|
WASHINGTON HOTLINE
Tax Quote of the Week
"Tax systems can
have multiple goals. For example, in addition to the common goal of
raising revenue for the government, goals can also include
redistributing income, stabilizing the economy, and achieving
various other social and economic objectives through the use of
preferences. Generally speaking, the greater the number of goals,
the more complex is the tax system."
-- The General Accounting
Office
CBO Estimates Deficits in 2009, 2010,
2011
The Congressional Budget Office (CBO) released its
August 2009 projections. The CBO periodically estimates the federal
revenues, expenditures and budget for the next 10 years.
This
estimate is based on the future tax rates for the federal government
and enables it to project total revenue. The other major factors are
expenditures for foreign and domestic programs and the rate of
inflation.
For the next three years the deficit projections
are:
| Year 2009 |
$1.6 trillion |
| Year 2010 |
$1.4 trillion |
| Year 2011 |
$0.92 trillion |
Federal deficits
tend to be higher when the business cycle is down. Because of the
recession in 2008, the CBO projection is that there will be larger
deficits for 2009, 2010 and 2011.
When the business cycle is
lower, federal payments for unemployment insurance and assistance to
those in need are higher. In addition, both personal and tax revenue
and corporate tax revenue are lower.
The CBO projections
indicate that the economy will be functioning below its full
potential for these three years. With slow and steady growth in the
economy, the CBO estimates that the economy will be close to full
potential by the end of 2011.
One Year Estate Tax
Extension Predicted
In a financial planning webcast on
September 2, 2009, John Buckley, Chief Tax Counsel for the House
Ways and Means Committee, discussed the estate tax.
In
response to a question on future plans for the estate tax he
responded, "I think one reason you will probably see a one-year
extension this year is statutory pay-go."
Mr. Buckley is
referring to the Statutory Pay-As-You-Go Act of 2009 (H.R. 2920).
This bill passed the House in June. If it is enacted, it exempts
some expenditures and tax provisions, including the permanent
extension of estate and gift taxes at 2009 levels.
However,
because the Senate may not pass the bill, the permanent extension of
the $3.5 million exemption and the 45% top estate tax rate would
cost $233 billion over 10 years. With the current deficit, it is
quite probable that the Senate will not pass a permanent estate tax
extension but will instead extend the 2009 estate tax provisions for
one more year.
Editor's Note: A one year "patch" still
leaves the estate planning world in a state of uncertainty. With the
large budget deficit numbers from CBO, there are senators who
privately suggest that the estate exemption could revert to $1
million in 2011. While this does not seem to be a very likely action
by the Senate, it continues to create uncertainty for estate
planners.
Gift Annuities Subject to Federal Securities
Law
In Warfield
v. Bestgen, No. 07-15586; D.C. No. CV-03-02390-JAT (9th
Cir., 24 June 2009), the Ninth Circuit Court of Appeals determined
that gift annuities are subject to securities law.
Between
1996 and 2001, the Mid-America Foundation lead by President Robert
Dillie offered charitable gift annuities. Mid-America worked through
financial planners and paid a commission to financial planners who
would encourage clients to create gift annuities with the
Foundation.
Rather than placing the $55 million collected
from 400 gift annuitants into a reserve fund and making payments,
President Dillie used the funds improperly and Mid-America became
bankrupt. Robert Dillie was sentenced to 121 months in prison for
fraud.
Receiver Lawrence Warfield was appointed to recover
assets and assist the 400 gift annuitants. He brought an action
against the financial planners to recover the commissions they had
received on placement of the gift annuities. His action was
successful in District Court in Phoenix, Arizona, and assessments
were levied against financial planners in the amounts of $31,900 to
$109,900.
The financial planning defendants appealed. They
claimed that gift annuities were not investment agreements subject
to the Securities Act of 1933. In addition, they maintained that
gift annuities and the planners were exempted from SEC regulation
under the Philanthropy Protection Act of 1995.
The Court
relied on the standard of SCC v. W.J. Howey Co., 328 U.S. 293
(1946). The Howey test indicates that a security is subject to the
1933 Securities Act if it is (i) an investment of money, (ii) in a
common enterprise, and (iii) the investor has an expectation of
profits.
With a charitable gift annuity, Mid-America did
receive funds, transferred the $55 million into a common pool that
was invested in stock and bonds and the annuitants did have an
expectation of profits. The annuitants would profit particularly if
they outlived their anticipated life expectancy. Therefore, the
Howey test was met.
The Court also reviewed the promotional
materials of the Mid-America Foundation and noted that its claim
that to receive "the same return through the stock market, investors
would have to find investments that pay dividends of 19.3%!" Other
brochures claimed that the gift annuity was "the oldest and safest
financial instrument available" and "the rate of return on a
Mid-America Foundation gift annuity is hard to beat!"
Under
the Philanthropy Protection Act of 1995 (PPA 1995), charities in
compliance with the Act are exempted from registration. However, the
Court indicated that even though the charity may be exempted from
registration under PPA 1995, they would still be subject to the
fraud provisions of the Securities Act. Therefore, because the gift
annuities are investment contracts covered by the 1933 Securities
Act, the fraud provisions are applicable.
The Court noted
that PPA 1995 does not provide a securities registration exemption
for organizations that pay a "commission or other special
compensation based on the number of donations collected for the
fund." Because Mid-America paid commissions to the financial
planners, the PPA 1995 registration exemption does not apply.
Finally, in response to the claim by the financial planners that a
gift annuity is a gift because donors' charitable intent is not a
security, the court indicated that the charitable motivation is
laudable but does not remove the gift annuity from the application
of the SCC anti-fraud provisions.
Therefore, the court
determined that gift annuities are investment contracts, that the
brokers are not exempted from registration and affirmed the lower
court decision.
Editor's Note: This case highlights
the importance of charitable gift annuity best practices. Most
charities issuing gift annuities follow good practices. Many
charities have reserve funds and endowments that far exceed
potential annuity liabilities. Therefore, charities will continue to
maintain and grow gift annuity programs. But all charities and
boards of directors for charities should ensure that they are
following these gift annuity best practices:
1. Promotional
materials should use careful language.
2. In all written and
electronic materials, emphasize fixed payments and the charitable
gift.
3. Communicate accurately about income tax savings and
partly tax-free income.
4. Maintain a substantial annuity
reserve balance; many organizations voluntarily choose to transfer
100% of the gift amount to the reserve fund.
5. Follow state
regulations on gift annuity registration, reserve requirements and
investment requirements for the state of domicile of the
annuitant.
6. Do not issue a gift annuity to an annuitant in
a regulated state if the charity is not registered, even if it
requires you to turn down a major gift.
7. Reinsure the gift
annuity if your organization is unable to provide adequate financial
security for the annuity reserve fund.
8. Do not ever pay a
commission to a gift annuity
representative.
Applicable Federal Rate of 3.4% for
September -- Rev. Rul. 2009-29; 2009-37 IRB 1 (18 Aug.
2009)
The IRS has announced the Applicable Federal Rate
(AFR) for September of 2009. The AFR under Sec. 7520 for the month
of September will be 3.4%. The rates for August of 3.4% or July of
3.4% also may be used. The highest AFR is beneficial for charitable
deductions of remainder interests. The lowest AFR is best for lead
trusts and life estate reserved agreements. With a gift annuity, if
the annuitant desires greater tax-free payments the lowest AFR is
preferable. During 2009, pooled income funds in existence less than
three tax years must use a 4.8% deemed rate of return. Federal rates
are available by clicking
here.
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PLR THIS
WEEK
PLR - 200935402 Supporting Organization Converts to
Private Foundation
Charity
is classified as a Sec. 509(a)(3) supporting organization. Its
purpose, as stated in the Articles of Incorporation, is to promote
the health and well-being of Community residents by supporting the
charitable activities of two specifically named 501(c)(3) hospitals.
One of these named hospitals is L. Support provided by Charity
includes financial assistance and services directly to the named
hospitals. Charity and M, a Sec. 501(c)(3) hospital not named in
Charity's Articles, entered into a joint venture agreement in which
each contributes at least one Sec. 501(c)(3) hospital into a new
Sec. 501(c)(3) organization known as System in exchange for a
respective membership interest percentage. System is the parent
hospital for subordinate nonprofit healthcare facilities such as L.
Charity may nominate System directors subject to M's approval, but
may not control operations or withdraw or transfer the interest to a
third party. System has not and will not distribute income to
Charity or M. Charity's revenue is entirely passive income. Charity
proposes an amendment to its Articles of Incorporation eliminating
the support of the specifically named hospitals in favor of a more
general promotion of the health and well-being of Community
residents.
The Service ruled that the proposed amendment to
the Articles of Incorporation will not change Charity's exempt
status but will cause reclassification from a supporting
organization to a private foundation. Under Sec. 501(c)(3),
exemption from federal income taxation requires that the
organization operate exclusively for charitable purposes and that no
part of net earnings insures to the benefit of any private party.
Reg. 1.501(c)(3)-1(c)(1) states that an organization satisfies this
requirement if it engages primarily in activities that accomplish at
least one Sec. 501(c)(3) purpose and fails if more than an
insubstantial part of its activities are not in furtherance of an
exempt purpose. The amended Articles also disqualify Charity from
Supporting Organization status under Sec. 509(a)(3) because Charity
eliminated its support of the two specifically named
hospitals.
To view the full PLR Click
Here.
|
CASE OF THE
WEEK
The Values-Based Lead Trust
Stacy Powers, 40, has led an interesting life. At the
age of 1, Stacy was put up for adoption. Stacy's mother was a
homeless woman with little resources to care for a young child. Soon
thereafter, Dr. and Mrs. John Powers adopted Stacy. The Powers were
very affluent and educated, but sadly were unable to have their own
children. Not surprisingly, the adoption of little Stacy was a dream
come true for the Powers.
Over the next 20 years of Stacy's
life, the Powers smothered Stacy with love, affection, time and
money. Stacy was a long way from her humble and tough beginnings.
Stacy soon became very accustomed to the constant "spoiling" and
financial support of her parents. As a result, Stacy possessed
little drive and initiative. In fact, her idea of a productive day
consisted of shopping trips and hours at the salon. Over the next 20
years, Stacy continued on this path. While a good person with a good
heart, the Powers felt that Stacy did not develop and mature as an
adult.
During a visit with their estate planning attorney,
the Powers expressed their concerns about Stacy. The Powers did not
want to leave their entire estate to Stacy fearing that she would
simply spend it away. Instead, the Powers wanted an estate plan that
provided retirement security, financial responsibility, and a love
of philanthropy.
What planned gift would give Stacy
philanthropic involvement? How could this planned gift be structured
to provide Stacy with retirement security and financial
responsibility?
To view the solution to this Case of the
Week Click
Here.
|
ARTICLE OF THE
MONTH
Current Planned Gifts III - Life
Estates
Under Sec.
170(f)(2) of the Internal Revenue Code, a person may give a
remainder interest in a personal residence or farm to a charity and
reserve the right to live there for one or two lives. But what if
circumstances change and the donor no longer desires to live in the
home? Or perhaps mother and father created a two-life estate and
father passes away? Are there options that mother should now
consider? Fortunately, there are several potential flexibility
options for a life estate donor.
Assume that John and Mary
Jones, both age 75, transfer the remainder interest in their
$300,000 home to charity. As owners, they agree to be responsible
for the maintenance, insurance and taxes. To make certain that both
John and Mary understand their obligations, they sign a Maintenance,
Insurance and Taxes (M.I.T.) agreement with the charity.
One
caution must be emphasized with respect to the "M.I.T." agreement -
the charity must have a life estate in the home and there can be no
prearranged obligation to select any of the possible flexibility
options. The IRS will deny the charitable income tax deduction if
any binding obligation exists. In any case, the purpose of having
flexibility options is enhanced by not choosing one until the time
for a later change of ownership.
To view the full Article
of the Month Click
Here.
|
Note: Case studies, articles, commentary and other
materials in the GiftLaw system are included solely as educational
information. Articles and editorial comments are offered as an
educational service to friends of this organization, and may not
always reflect our official position on any issue. Since case
studies or articles may not always reflect the current AFR or tax
law, it may be necessary to run any illustration with a current
version of Crescendo to obtain updated information. If professional
services are required, all persons shall consult with their
qualified professional advisors. Tax Quotes are courtesy of Jeffery
L. Yablon, Washington, D.C.
© Copyright 1999-2009
Crescendo Interactive, Inc.
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| Immanuel St. Joseph's
Foundation |
September 7,
2009 |
| |
Thank you for your interest in
gift planning. To access any of this updated GiftLaw information,
please select our web page by clicking here.
Cordially
yours,
Bob Weiss
Immanuel St. Joseph's Foundation
| |
